The present invention is directed, in various embodiments, to systems and methods for evaluating the investment ratings of a securities analyst.
A securities analyst is a person, employed by a brokerage house or a non-brokerage entity, who studies publicly-traded companies in order to make informed recommendations about either the absolute or relative investment merits of certain securities, such as common stock, issued by the publicly-traded companies. Analysts often specialize in a single industry, and use a wide variety of techniques for researching and making such recommendations. The reports and recommendations they publish may be used by traders, mutual fund managers, portfolio managers and other investors in their investment decision-making processes.
A common approach for measuring a securities analyst's investment rating performance is to compare the performance of a “passive” portfolio of securities, comprising securities covered by the analyst, against the performance of an “active” portfolio, comprising the securities covered by the analyst weighted according to the analyst's investment rating for each security. For example, “strong buy” recommendations may be weighted twice as heavily as “buy” recommendations. Similarly, “strong sell” recommendations may be weighted twice as heavily as “sell” recommendations. The outcome of the comparison of the “passive” versus “active” portfolios is a metric that provides some indication of the analyst's investment rating performance.
There are, however, drawbacks to this traditional performance evaluation methodology, most notably the difficulty in comparing the investment rating performance of one analyst to another. The conventional “active” versus “passive” performance analysis is heavily affected by the volatility of the analyzed securities: the more widely dispersed the returns among the analyzed stocks, the greater the opportunity to score well. The active versus passive measurement does not account for this volatility, making the comparison of analysts covering industries with different return and volatility characteristic not meaningful. Also, because of the absolute nature of the conventional “active” versus “passive” performance analysis, comparisons of investment rating performance from year-to-year for a particular analyst are not very meaningful. Other drawbacks of the active versus passive approach include (i) lack of transparency (it is difficult to understand the degree to which a call on a given security contributes to the overall measure of performance), (ii) inflexibility to accommodate or consider alternate benchmarks, such as country or region, for evaluating performance, and (iii) the measurement is not outcome-based (a call on a given stock is compared to the benchmark at arbitrary points in time).